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Central bank under fire

Kuda Chikwanda



THE Reserve Bank of Zimbabwe (RBZ) has come under intense criticism from the banking sector which says it is being “milked dry” to finance a cash-strapped

government.


Bank executives who spoke to the Zimbabwe Independent this week on condition of anonymity said the central bank was the instrument government was using to force the banking sector to finance its excessive borrowing which shot up to $21 trillion in November last year.


The executives accused RBZ governor Gideon Gono of vindictiveness hence their unwillingness to be named. Gono, together with Finance minister Samuel Mumbengegwi, last week accused banks of being responsible for the cash crisis and threatened unspecified action if corrective measures were not taken by this week.


Mumbengegwi went to the extent of asserting the banking sector as over-banked and issued threats of a government crackdown on the sector, saying cabinet was concerned about the cash shortage.


However, bank executives and economists have attributed the cash crisis to the RBZ saying the central bank was now trying to pass the blame on to the banking sector.


University of Zimbabwe economist Tony Hawkins laid the blame squarely at RBZ’s door which he accused of failing to print enough money to put into circulation.


“The fact that there is not enough cash is RBZ’s responsibility. It is a realistic projection banks will go bust. The fact banks are being forced to take up negative yielding instruments points to how RBZ is funding government on the back of banks’ sweat,” Hawkins said.


Hawkins was harsher in his assessment of the crisis, accusing the central bank of engineering the crisis to prove the existence of cash barons.


“RBZ engineered the crisis trying to prove the existence of cash barons,” he said. “While I am a bit surprised that banks would admit playing the equities market, I believe there is a very real problem that 50% of their money lies with the RBZ at negative yielding rates and when they want to borrow back their money, they are charged penal interest rates.”


The Banking Act prohibits banks from buying shares on the Zimbabwe Stock Exchange except when underwriting listings.


But the executives admitted that they had been forced to trade in equities occasionally to avoid going bankrupt, meet client needs and to preserve shareholder value.


“In the face of record high inflation, a rapidly depreciating dollar and silence from the central bank, we had to do something. We faced bankruptcy and we still do if solutions do not emerge from RBZ,” one banker said.


Other bankers said the cash crisis had been precipitated by the central bank’s refusal to adopt policy measures geared to preserve value in times of hyperinflation.


An analysis of claims made by the executives reveals one thing — that the RBZ is no sacred cow. The central bank has been fighting excess liquidity on the market and introduced a number of measures to do so.


However, despite an obvious liquidity crunch that has affected the sector, the RBZ has continued holding on to half of all demand deposits from banks.


“If there was excess liquidity justifying the use of these RBZ instruments, we would not be facing a liquidity crunch,” said economist John Robertson.


Robertson accused the RBZ of holding onto statutory deposits of 50% and charging punitive rates of 975% for secured lending as a means of providing funding.


“They simply wanted cheap funding and that’s why the RBZ will not reduce the statutory deposits. Those demand deposits are financing government expenditure and subsidies through cheap financing options offered by the RBZ,” Robertson said.


He said the Agricultural Support Enhancement Facility and the Basic Commodity Supply Side Intervention (Baccossi) funds were coming out of statutory deposits.


The bank executives also claimed that apart from inflation, these “excess-liquidity mopping” measures had managed to worsen the crisis. Besides the high statutory deposits, the RBZ has also used Treasury Bills (TBs) and Non-negotiable Certificates of Deposit (NCD) instruments.


The RBZ also holds statutory deposits of 50%, meaning that at any point in time, half of any banks’ demand deposits are with the central bank at 0% interest. As lender of last resort, the RBZ charges punitive interest rates on banks faced with shortages. Currently the RBZ is charging 975% interest, compounded daily on secured lending.


“RBZ holds half of our money in statutory deposits, and yet when we face a shortage,” one banker said. “It charges us 975% daily for that money. It is daylight robbery, and if everyone demands their money at once, we pay 975% for storing it with the RBZ where it earns no interest.”


Robertson said because of high inflation, the money held as statutory deposits was fast losing value and in the process, weakening banks.


“That money loses value faster because of inflation,” he said. “Government does not want to hear inflation figures of 150 000% and yet those are the ones operating. This leaves banks in a very precarious position having been unfairly robbed of their deposits.”


In the name of fighting excess liquidity, the RBZ outlawed banks from holding surpluses at the end of a trading day.


Banks are supposed to use their trading surpluses to buy TBs with negative yielding interest rates of 340% per annum or to lend to other banks facing shortages under inter-bank trading or to lend to clients.


Since the cash crisis set in some three months ago, the latter option has been unfavourable with banks as they all have been facing liquidity problems. Lending to clients requires a minimum of 90 days before the bank can recover its money and has also proved very unpopular given the rampant inflation.


“The risks of the inter-bank market cannot be overstated,” another banker added. “What if another bank fails to pay you on time in this liquidity crunch? Lending to clients means money is tied down for a minimum of 90 days. We have to think on our feet to survive.”

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